Pay Student Debt or Save for Retirement? The IRS Made It Easier to Do Both

The IRS ruling opens the door to retirement savings for people struggling just to pay their student debt. Hero Images/Getty Images

Landing an entry-level position often requires taking on C-suite levels of student debt to meet the minimum job requirements. In 2017, for example, the average college graduate walked off campus with about $39,400 in loan debt, according to a Student Loan Hero survey.

And while education plays a big role in forging a desired career path, that degree can leave you in a real bind once the paychecks start coming in: After the basics like food and shelter, do you pay down debt or save for retirement?

Naturally, getting debt off the books has taken precedence over retirement contributions for many young people — debt collectors, after all, don’t call if you skip 401(k) contributions. Sixty-six percent of people between the ages of 21 and 32 have absolutely nothing saved for retirement, according to the National Institute on Retirement Security. That means most young workers are foregoing years of tax-deferred, compounding growth in a 401(k), which could cost them hundreds of thousands of dollars by the time they’re ready to retire.

Fortunately, the IRS may have just helped workers escape this catch-22. On Aug. 17, the federal agency released a ruling that charts a path for employers who want to use 401(k) plans to help their employees pay down debt and save for retirement.

A 401(k) is a type of retirement plan that allows employees to contribute pretax dollars from each paycheck into investments that have potential for tax-advantaged growth. Employers can also match employee contributions up to a certain percent to help grow that pot even faster. Well, one employer (left anonymous in these types of public releases) reached out to the IRS to amend its 401(k) plan and offer a “student loan benefit program.” Here’s how it would work:

If an employee voluntarily enrolled in this company’s student loan benefit program, the employer would link its matching contributions to the amount an employee pays for student loans. Even if the employee made no contribution whatsoever to their 401(k), the employer would make “matching” contributions as if they had. Basically, employee student debt payments are treated as if they were 401(k) contributions that the employer would have otherwise matched.

The employer submitted this inquiry to the IRS to determine whether such a benefit would run afoul of the many regulations that accompany employer-sponsored retirement plans. And, with a few stipulations, the IRS gave the plan a green light and determined it didn’t violate any prohibitions on the books.

It’s important to note that rulings like this one aren’t codified into law and can’t be used as precedent. However, this ruling does give other employers who want to craft a similar student loan debt benefit through a 401(k) a clear path to do so.

While this is good news if you happen to work for the company that petitioned the IRS in this case, it’ll take some time for other employers to follow suit and roll out their own plans, if they choose to. However, this is something that you, along with the 44 million other Americans with student loan debt, should keep an eye on moving forward. Reach out to your human resources department to see if your company offers any student loan repayment assistance or might plan to in the future. And, if you haven't already, start saving for retirement as soon as possible. Your future self will thank you.

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